Hong Kong saw its borrowing costs in the money market surge to a near eight-year high, with the US Federal Reserve almost certain to raise the interest rate later this week.

The overwhelming probability that the Federal Open Market Committee will increase the benchmark rate raised market concerns over capital outflows due to the rising allure of US assets.

The benchmark one-month Hong Kong Interbank Offered Rate, or Hibor, surged to 0.624 per cent on Tuesday, the highest level in near eight years, highlighting a squeeze on liquidity conditions in the market.

With liquidity tightening, or the capital that’s available to be invested in financial markets decreasing, the Hang Seng Index fell 1.4 per cent on Monday.

We are seeing fund flows moving back to developed markets as their bonds are surging

Neeraj Seth, Blackrock

The city’s borrowing costs have been rising steadily since the shock victory of Donald Trump in the US presidential election last month sent global bond yields skyrocketing.

The yield on the benchmark 10-year Treasury note hit a high of 2.5 per cent and settled at 2.478 per cent on Monday, the highest close since June 26, 2015, as expectations of higher inflation in the US were further lifted by a recent crude oil price rally.

Emerging market bonds, in particular, which had benefited from investors’ appetite for yield in the past, have been left reeling by a tidal wave of capital outflows.

“We are seeing fund flows moving back to developed markets as their bonds are surging,” said Neeraj Seth, the head of Asian Credit at BlackRock’s Asia Pacific Active Investments Group. “The trend was already in place ahead of the election results and the US election accelerated it.”

Driven by surging US Treasury yields, Hong Kong’s 10-year government bond yield jumped 15 basis points to 1.72 per cent, the highest for the benchmark notes of that tenor since January. Bond prices move inversely to bonds yields.

Notably, Hong Kong’s three-month Hibor rose four basis points to 0.87 per cent on Tuesday, leaving its gap with Libor, the benchmark rate that the world’s biggest banks charge each other for short-term loans, at nine basis points, compared to three times that spread just two months ago.

Higher Hong Kong rates will help to discourage outflows and thus stabilise the local dollar, said Marvin Chen, an analyst at JPMorgan Chase in Hong Kong.

“Even with two expected US rate hikes next year, the rate gap with Hong Kong won’t be wide enough to spur significant outflows,” said Thomas Shik, acting chief economist at Hang Seng Bank.